Essay: Co-operative banking

Chapter-1

Introduction

Co-operative credit is the basis of co-operative banking. The co-operative banking system also performs the basic functions of banking. These banks are set up under co-operative Act. The credit provided through co-operative banks is called co-operative credit. The evolution of co-operative banks are voluntary organizations set up by collective ownership and unlimited membership which are sum on democratic lines which collect the savings of their members and advance loans to them.

1.1 Definitions:-

• According to the International Co-operative Alliance Statement of co-operative identity, a co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.
• Wikipedia Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
• “Cooperative bank is a mutual society formed, composed and governed by working people themselves by encouraging regular saving and granting small loans on easy terms of interest and repayment”. Derine
• “Cooperatives bank is a voluntary association of individuals with unrestricted membership and collective owned resources formed by small producers or wage earners, conducted on a democratic basis by accumulating the savings of the members and granting them credit on easy terms of interest and repayment, surplus being placed to reserve or distributed among depositors, borrowers and shareholders”. N. Baron
• “Co-operative banks are small-sized units organized in the co-operative sector which operate both in urban and non-urban regions”. J.Gupta and S. Jain
• “Co-operative banks play a pivotal role in bolstering the common individual and financing his business and personal needs”. A.K. Soni and Dr. H. P. S. Saluja
• The International Cooperative Alliance (ICA): An autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations, through a jointly owned and democratically controlled enterprise.
• A Co-operative bank is a financial entity which belongs to its member, who is at the same time the owners and the customers of their bank. (International Co-operative Banking Statement)
• Co-operatives banks that are operating in the economy under co-operative model of ownership. This is situation where a number of people get together and form a co-operative and then run the bank jointly. (Indian Stock/Share Market)
• The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary co-operative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered on communities, localities and work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably. (Dr. S. Mayilvaganan and E. Soundararajan)
• Cooperative banks are organizations of and for people, not capital. Their central objectives are to improve the economic position of members, whether individuals or enterprises, denied access to other banking institutions owing to their inability to offer sufficiently sound collateral; to facilitate the continual recycling of cooperative capital into cooperative enterprise; and to attract and manage capital obtained from outside the cooperative sector for use by individual cooperatives. (Zawojska.A & Siudek.T).

1.2 History of Co-Operative Banks

Co-operative banks were set up for the first time in Germany. The first known mutual aid society in India was probably the “Anyonya Sahakari Mandali” organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade Weavers” Urban Credit Society (March 13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906.

The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.

1.3 Characteristics of cooperative bank

1.3.1 Voluntary Membership

This is the first principle of co-operation. A person who has a common interest and is prepared to be abiding by the rules of the society has the right to join the society as and when he wishes to do so, continue in it as long as he likes, and leave it at his will.

1.3.2 Open Membership

The membership of a co¬operative organization is open to all irrespective of race, colour, creed, caste, or sex. Within that particular group, no distinction can be made on the basis of race, color, creed, caste, or sex.

1.3.3 Finances

The finances of a co-operative society are contributed by members through the purchase of shares. Since co-operatives are generally formed by the weaker and poorer sections of the society, their capital collections are meager. Also, there is limit to the maximum shares that a member can buy in a co-operative society. The government also lends financial support in the form of loans from the State and Central Co-operative Banks.

1.3.4 Liability of Members

Like company organization, a co-operative society may be organized on the basis of either limited or unlimited liability. The limited liability societies, of course, are more popular. In the case of limited liability societies, the word ‘limited’ must be used as part of the society’s name.

1.3.5 Democratic Control

Co-operation is democracy in action. The business of co-operative society is generally managed by a committee elected by the members at annual general meeting. Since most of the co-operatives operate on a local scale, the meetings of the members are well attended, and this puts the managing committee under a lot of close supervision. Again, to strengthen democracy, some issues are not decided by a bare majority alone, but by two- thirds or three-fourths majority. Democracy is to be preserved through a regular system of membership education, frequent meetings of general membership, managing committee, and sub-committees with which maximum number of members are to be associated.

1.3.6 Limited Interest on Capital

Co-operation recognizes the capital is useful and necessary for running a business, but it should be relegated to the level of a servant, not a master. Co-operation uses the immense power of capital to carry on the working of the society in the interest of its members and community in general and for this service; capital is entitled to a limited return, known as ‘dividend’ in India. In co-operative laws, a ceiling has been put to the rate of dividend which could be declared out of profit for the use of capital and it generally never exceeds 10%.

1.3.7 Distribution of Surplus

Unlike profit-oriented enterprises, the surplus (i.e., profit after limited interest has been paid on capital) of a co-operative society is not distributed to the members in the ratio of their capital contribution or in an agreed ratio. Under the provisions of the law, at least 25 percent of the profit must be transferred to the general reserve.

1.3.8 Service Motive

A co-operative society is formed with the basic objective of providing useful service — be it credit, consumption goods, or input resources — to its members and the society. In other words, the objective of a co-operative society should not be to maximize profits at the cost of others, as is usually the case with other types of business enterprises. Also, it does not mean that a co-operative society should sustain losses.

1.3.9 Registration and Legal Status

Being voluntary in character, registration of a co¬operative is optional. In India, co-operatives desiring to be registered may do so under the Co-operative Societies Act, 1912, or relevant State Co-operative Societies Acts, as the case may be.

The minimum essential conditions for getting a co-operative society registered are:

(i) There must be at least 10 adult persons (i.e., persons above the age of 18 years) to form the’ society.

(ii) The application should provide for essential information, e.g. name and address of the society, its aims and objects, details of share capital, etc.

(iii) Along with the application must also be enclosed two copies of the byelaws, i.e., rules and regulations governing the internal functioning of the society.

(iv) The Registrar after the scrutiny of the application, which must be duly signed by at least 10 members, and satisfying himself about the correctness of the co-operative society may issue a certificate, under his seal and signature, and the society will now come into existence and acquire the legal status.

(v) Once the society is registered, it can admit new members and also issue its shares. It may be pointed out that unlike a company, a co-operative society can issue shares without a prospectus. But, like a company, every co-operative society is subjected to a lot of government supervision — for instance, it has to get its accounts audited by an auditor from the co-operative department, regularly submit its accounts to the Registrar, and in some cases (like the co-operatives of Madhya Pradesh) it has to get the appointment of managerial personnel approved by the Registrar.

1.3.10 Education and Training

Apart from the characteristics, discussed above, a co-operative society also exhibits the feature of education and training to its members with the purpose of developing co-operation into well-organized movement.

1.4 Objectives of Co-operative Banks

• To promote and develop in India sound and progressive banking principles, practices and conventions and to contribute to the developments of creative banking.
• To render assistance and to provide various common services to Members and to the banking industry.
• To develop and implement new ideas and innovations in banking services, operations and procedures.
• To organize co-ordination and co-operation on procedural, legal, technical, administrative or professional problems and practices of banks and the banking industry.
• To initiate advance planning for introduction of new systems or services in the banking industry.
• To collect, classify and circulate statistical and other information on the structure and working of the banking system.
• To act as a clearing house for dissemination and exchange of statistical data, information, views and opinions on the systems, procedures and practices, and organization and methods of banks and on the structure, working and operations of the banking system.
• To explore, plan, co-ordinate and organize detailed surveys on banking, business, resources, personnel and management development programmer of banks and the banking industry.
• To pool together talents and resources available with members and to organize exchange of expertise and experiences of members for simplifying forms and procedures, for reducing cost of operations, for increasing efficiency and productivity and for such other common purposes as may be necessary or relevant to banks and the banking industry.
• To organize exchange of credit information and opinions, export information or information and views on any other aspects of interest to banks or the banking industry.
• To promote education and knowledge of the law and practice of banking.
• To issue periodical newsletters, bulletins or magazines and publish books, pamphlets or other literature on matters of interest to members and to the banking industry.
• To project a good public image of banking as a service industry and develop good public relations.
• To promote harmonious personnel relations in banking industry and to devise ways and means for involving banking personnel in the Endeavour’s of banks for growth and development of banking and the economy of the country.
• To organize, promote and afford facilities for indoor and outdoor games, any form of sports, recreation, sports competitions, events, cultural activities, social activities, fine arts, social meetings, entertainments and to organize meetings for the above purposes and to provide for purposes by purchasing, acquiring, taking on lease, own, hire or otherwise playing fields, grounds, buildings, pavilions and other facilities.
• To give financial assistance to individuals or bodies, from out of its own funds, or by collection from its members, or from any other source, and for the purpose of such collection, to accept grants, donations, etc. in cash or kind from Government, its members, other organizations, members of the public, etc. and to collect subscriptions, membership and other fees and to levy fees or charges for the use of the facilities and to raise funds in any manner to strengthen the financial position of the Association, from time to time, for the purpose of providing education, training and facilities for imparting basic, advance knowledge and techniques in games, sports, cultural activities, social activities, fine arts, etc. and to give donations, technical and other assistance, sports equipments, sports facilities and expert guidance to organizers for this purpose whether its members or not and to conduct, organize, participate or to associate itself in State-Level, Nation, International Tournaments and competitions pertaining to sports, cultural activities, social activities, fine arts, etc., held in or outside India.
• To found, establish, develop and finance a separate body for the promotion of objects contained in Clauses n, nn, nnn, and generally, and to register it as a Society and/or Public Trust, or a Company under the provisions or relevant Acts, as the case may be.
• To maintain continuous communications with the representatives of bank employees, to conduct talks, discussions, and negotiations with them and to arrive at Settlements.
• To provide assistance and guidance to members in interpretation and implementation of Awards, Settlements, etc.
• To assist, advise and guide all members and the smaller members in particular on all their needs, difficulties and problems of growth, development and working.
• To act as an agent or a representative of a member or members in respect of matters connected with any of their operations working or administration.
• To maintain close co-ordination and liaison with Reserve Bank of India, All Financial Institutions, Chambers of Commerce, Organizations of Banking Industry, Management or Educational Institutes, Universities and such other Organizations for realizing the subject and purposes of the Association.
• Generally to do all and any other thing that may be necessary or relevant for the realization of the objects and purposes of the Association directly or indirectly.
• To carry on publicity for the purpose of educating public opinion with regard to the scope, importance and activities of the banking industry, for creative growth and development.
• To do all and such other things as are incidental or conductive to the attainment of any or all of the above objects.

1.5 Advantages of Cooperative Bank

1.5.1 Easy to Form

The formation of a cooperative society is very simple as compared to the formation of any other form of business organisations. Any ten adults can join together and form a cooperative society. The procedure involves in the registration of a cooperative society is very simple and easy. No legal formalities are required for the formation of cooperative society.

1.5.2 No Obstruction for Membership

Unless and otherwise specifically debarred, the membership of cooperative society is open to everybody. Nobody is obstructed to join on the basis of religion, caste, creed, sex and colour etc. A person can become a member of a society at any time he likes and can leave the society when he does not like to continue as member.

1.5.3 Limited Liability

In most cases, the liability of the members of the society is limited to the extent of capital contributed by them. Hence, they are relieved from the fear of attachment of their private property, in case of the society suffers financial losses.

1.5.4 Service Motive

In Cooperative society members are provided with better good and services at reasonable prices. The society also provides financial help to its members the concessional rates. It assists in setting up production units and marketing of produces small business houses so also small farmers for their agricultural products.

1.5.5 Democratic Management

The cooperative society is managed by the elected members from and among themselves. Every member has equal rights through its single vote but can take active part in’ the formulation of the policies of the society. Thus all members are equally important for the society.

1.5.6 Stability and Continuity

A cooperative society cannot be dissolved by the death insolvency, lunacy, and permanent incapability of the members. Therefore, it has stable life are continues to exist for a longer period. It has got separate legal existence. New members join and old members may quit the society but society continues to function unless are otherwise all members unanimously decided to close the same.

1.5.7 Economic Operations

The operation carried on by the cooperative society economical due to the eliminations of middlemen. The services of middlemen are provided by the members of the society with the minimum cost. In the case of cooperative society, the recurring and non-recurring expenses are very less. Further, the economies of scale-ma production or purchase, automatically reduces the procurement price of the goods, thereby minimises the selling price.

1.5.8 Surplus Shared by the Members

The society sells goods to its members on a nominal profit. In some cases, the society sells goods to outsiders. This profit is utilised for meeting the day-to-day administration cost of the society. The procedure for distribution of profit that some portion of the surplus is spent for the welfare of the members, some portion kept reserve whereas the balance shared among the members as dividend on the basis of this purchase.

1.5.9 State Patronage

Government provides special assistance to the societies to enable them to achieve their objectives successfully. Therefore, the societies are given financial low at lower rates. Government also extends much type of subsidies to cooperative societies strengthening their financial stability and sustainable growth in future.

1.6 Problems of Cooperative Banks

1.6.1 Limited resources

Cooperative society’s financial strength depends on the cap contributed by its members and loan raising capacity from state cooperative banks. The membership fee is limited for which they are unable to raise large amount of resources as their members belong to the lower and middle class. Thus, cooperative are not suitable for the large scale business which require huge capital.

1.6.2 Inefficient management

A cooperative society is managed by the members only. They do not possess any managerial and special skills. This is considered as major drawback of this sector. Inefficiency of management may not bring success to the societies.

1.6.3 Lack of secrecy

The cooperative society does not maintain any secrecy in business because the affairs of the society are openly discussed in the meetings. But secrecy is very important for the success of a business organisation. This paved the way for competitors to compete in better manner.

1.6.4 Cash trading

The cooperative societies sell their products to outsiders only in cash. But, they are usually from the poor sections. These persons require an availing credit facility which is not possible in the case of cooperatives. Hence, marketing is a shortcoming for the cooperatives.

1.6.5 Excessive Government interference

Government put their nominee in the Board of management of cooperative society. They influence the decision of the Board which may or may not be favourable for the interest of the society. Excessive state regulation, interference with the flexibility of its operation affects adversely the efficiency of the management of the society.

1.6.6 Absence of motivation

The members may not feel enthusiastic because the law governing the cooperatives put some restriction on the rate of return. Absence of relationship between work and reward discourage the members to put their maximum effort in the society.

1.6.7 Disputes and differences

The management of the society constitutes the various types of personnel from different social, economical and academic background. Many a times they strongly differ from each other on many important issues. This becomes detrimental to the interest of the society. The different opinions and disputes may paralyses the effectiveness of the management.

1.7 Co-operative Banking Structure in India

1.7.1 National Level Institution- NABARD

NABARD is the regulation institution of cooperative credit structure in our country. Sit is an Apex Bank. It was set up on 12 July, 1982.The bank was made responsible to remove the problems of agriculture and rural development and make the cooperative credit structure sound in the country. The NABARD was set with the integration of Agriculture Refinance and Development Corporation (ARDC) and the agricultural department of the Reserve Bank of India. The ARDC was set up to provide necessary assistance, advice and consultation to cooperative bank as a special institution in 1963 which worked up to 1975.

At the time of establishment the capital of NABARD was Rs.100 crore in which 50 percent of share were Government of India and 50 percent of RBI. At present the capital of NABARD has been raised from Rs.100 crore to Rs 2000 crore. Besides share capital the whole of the assets of ARDC have also transferred to NABARD. NABARD has been empowered to increase its reserves by selling debentures; acceptance of long-term deposits of banks. It can also borrow from Central and State Governments to increase its capital.

The NABARD is managed by Board of Directors comprising of 11 members. Various specialist, officers etc. are nominated by Government of India on the Board of Directors. At present there is one chairman, two rural economic specialists, three directors of RBI, three officials of central government and two representative officers of various states, all are making the Board of Management.

1.7.2 Short-term and Medium-term Co-operatives

In case of Short-term and Medium-term Co-operative credit there are three tier systems. At the village level there is primary co-operative credit societies. At the district level there is central Co-operative Bank known as State Co-operative Bank. The volume of credit depends upon the strength of these three tier system.

1.7.2.1 Primary Agricultural Co-operative Credit Society

There has been lack of credit institutions in India’s rural economy. The organized sector could not provide desirable role of indigenous bankers and money lenders in rural credit. The All Indian Rural Credit Survey Committee in its report emphasized the role of cooperative credit societies in 1954. On the recommendation of the commerce special attention was paid on the development of primary cooperative credit societies. The number of primary cooperative credit societies is the highest in the country.

1.7.3 Central Co-operative Banks

There are 367 District Central Cooperative Banks which lend about Rs. 39,370 crores annually. These are federations of primary credit societies in specified areas covering the whole district. These Banks have a few private individuals as shareholders who provide both finance and management. They lend to village primary societies and attract deposits from the public. They are intermediaries between Central Cooperative Banks and State Cooperative Banks. NABARD has formulated a scheme for the rehabilitation of weak Central Cooperatives Banks. NABARD is providing liberal assistance to State Governments for contributing to the share capital of the weak Central Cooperative Banks.

1.7.5 Long-Term Credit Co-operatives

Long term credit in the co-operative structure is provided by Land Development Banks (LDBs). They were known as Land Mortgage Bank because they used to make loans and advance to the farmers on the basis of mortgaging to papers of ownership. They provide credit for the long-term for purchasing land, tractor, threshers and permanent improvement on land. The LDBs are gaining grounds on account of the following reasons:

1. Poor resources of the primary agriculture credit societies.
2. It is financially wiseful to utilize deposits and loans meeting long term requirements of the farmers.
3. Lack of expertise for valuation and title deeds for loans with the societies.
4. Growing demand for long term credit.

There are two layers of long term credit given by Land Development banks as discussed below:

1.7.5.1 Primary Land Development Bank (PLDB)

Primary land development banks provide long term credit to farmers and such banks are set up at the district level.

1.7.5.2 State Land Development Bank

It is an apex bank in credit cooperative providing long term credit to the farmers. It coordinates the functioning of primary land development banks in the state and provides advances to the PLDBs.

Land Development Banks obtain their funds from shares, capital, reserves, deposits and issue of bonds and debentures. The Banks grant long term finance for the following purposes:

1) Redemption of old debts.

2) Improvement, reclamation and development of land.

3) Purchase of agricultural machinery and equipments.

4) Other productive purpose like sinking and repairing of well.

5) Redemption of mortgage and agriculture lands.

The Land Development Banks give loans the members on the societies of land, the loan given are generally limited to 50% of the value of the land mortgage or sometimes 30 times the land revenue payable on them. While making loans and advance to farmer proper assessment of title of land to be given as mortgage, right to alienate mortgage land, amount of land revenue paid on such land purpose of borrowing and repayment capacity is made. The duration of such loan varies from 15 years to 30 years.

Land Development Banking is yet to take strong roots in our country barring a few states. It has contributed in large measure to agriculture development by lending specially for minor irrigation. All loans are for productive purposes benefiting mostly the small farmers.

1.8 Definition Loan Waiving

According to business dictionary:

“A stipulation in a loan contract whereby the borrower waives the protection of any laws that prevent the seizure of personal property that is otherwise exempt from seizure. Such contract provisions have been prohibited by bank regulators since 1985 except in cases where property has been assigned as collateral for the loan”.

A loan waiver is the waiving of the real or potential liability of the person or party who has taken out a loan through the voluntary action of the person or party who has made the loan.

If you waive a loan, you do not require that it be paid back, or at least that’s how I understand it. If you trade something, you expect to be paid for it.

A waiver is when a person, government, or organization agrees to give up a right or says that people do not have to obey a particular rule or law.

1.8.1 Objectives of the Scheme

The objectives of the scheme are:

1. To fast track development of the agricultural sector of the Nigerian economy by providing credit facilities to commercial agricultural enterprises at a single digit Interest rate.

2. Enhance national food security by increasing food supply and effecting lower Agricultural produce and product prices, thereby promoting low food inflation.

3. Reduce the cost of credit in agricultural production to enable farmers exploit the Potentials of the sector.

4. Increase output, generate employment, and diversify the revenue base, increase foreign Exchange earnings and provide input for the industrial sector on a sustainable basis.

References

Websites

1. http://www.rbi.org.in/scripts/fun-urban.aspx

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3. www.merriam-webster.com/dictionary/society

4. forum.wordreference.com/showthread.php?t=1840652

5. dictionary.reverso.net/english-cobuild/waiver%20of%20interest

6. archive.indianexpress.com/…loan-waiver-beneficiaries…/1101143/

7. ibnlive.in.com/newstopics/loan-waiver-scheme.html)

8. http://www.businessdictionary.com

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